Bank of England aims for greener corporate bond portfolio

The Bank of England set out plans on Friday to make its 20 billion pounds ($28.4 billion) of holdings of sterling corporate bonds better aligned with government goals to achieve net zero carbon emissions.

However, the central bank will not embark on an immediate sell-off of bonds issued by businesses that have high carbon emissions, such as power utilities and oil companies when it begins the rebalancing process later this year.

“Divestment is a powerful tool, and should remain squarely in the toolkit. But it should be used as a credible threat to reinforce incentives, not an indiscriminate ‘quick fix’,” BoE executive director for markets Andrew Hauser said in a speech hosted by Bloomberg.

The central bank said it would set targets for the overall emissions of its corporate bond holdings, invest in ‘green’ corporate bonds as they became available, and require bond issuers to publish their emissions.

The BoE said it would seek to rebalance its bond holdings towards issuers with a stronger climate performance and restrict investment in bonds issued by businesses whose activities were widely regarded as inconsistent with lower carbon emissions.

Issuers whose emissions are currently high would need to set out a credible path to reduce emissions or risk no longer being eligible for bond purchases.

The BoE will focus on the path of a company’s emissions as well as the outright level.

“The precise calibration of this approach will be developed in the coming months,” Hauser said. The BoE is not currently buying corporate bonds, and the next scheduled reinvestment of maturing bonds is due in the final quarter of 2021.

Hauser said the BoE was the first central bank to take these steps, and hoped it would set a direction for the wider market.

The BoE next month will ‘stress test’ banks and insurers for their exposure to climate risks.

The BoE doubled its corporate bond holdings during last year’s COVID pandemic. Bonds to date have been chosen to be representative of sterling issuance by non-financial companies that make a material contribution to the British economy.

The BoE owns about 10 per cent of all corporate bonds that fit its eligibility rules. Hauser said the rebalancing would not damage the BoE’s main goals of targeting 2 per cent inflation and ensuring financial stability.

Bonds recently classed as eligible for purchase include those of energy giant BP, mining company Rio Tinto and German carmakers Volkswagen and Daimler .

In March finance minister Rishi Sunak changed the BoE’s policy mandate to require it to support a government commitment to shift towards an economy with net zero carbon emissions.

Britain’s government has given extra focus to environmental issues this year as it prepares to host the United Nations COP26 climate summit in Glasgow in November.